2. Problems of Mutual Funds
1. Extreme fluctuation in the stock market
2. Lack of investor education
3. Lack of transparency
4. Tracking error
5. Difficulty in distribution
6. Poor investor servicing
7. Irrational Investor behavior
8. High Price โearnings multiples
3. Problems of Mutual Funds
1. Extreme fluctuations in the stock market
The mutual fund invest a huge size f funds in stock market securities for
the purpose of having investment of high liquidity. However, Indian
stock market is subject to extreme fluctuations due to intense
speculative activity. After a period of boom, the market goes into a
prolonged period of bear market. The mutual fund have to sell the
securities in a bear market in order to have the cash to pay off the unit-
holders.
4. Problems of Mutual Funds
2. Lack of Investor Education
The investor are not properly educated about the time of entry and
time of exit. Having been accustomed to depositing in the banks, they
enter the investment at any time and exit any time depending upon the
need for cash.
5. Problems of Mutual Funds
3. Lack of Transparency
Some of the funds do not reveal the composition of the portfolio.
Changes in the composition are conveyed to the unit-holders once in
three months. 3 months comprise of a long period in stock market
related investment.
6. Problems of Mutual Funds
4. Tracking Error
Some of the index funds sell and buy the shares in their portfolio to use
a temporary opportunity to make a profit. If they find that a particular
security has gone up in value temporarily, they sell the shares with idea
to buy them back, what is regarded as temporary may become
permanent leading to buying the share back at a high prices.
7. Problems of Mutual Funds
5. Difficulty in Distribution
It is very difficult for the mutual funds to open branches due to
skyrocketing real estate prices. Therefore thy are not able to distribute
the products through their own branches as in the case of banking
products.
8. Problems of Mutual Funds
6.Poor Investor Servicing
Initially, this allegation was there on the mutual funds. But in recent
times they are the best users of computerization, networking and the
internet leading to excellent services, in fact, the best investor services
can be witnessed in case of mutual funds.
9. Problems of Mutual Funds
7. Irrational Investor Behaviour
the investor have the confidence of investment during the boom
period in the stock market. The mutual funds are able to make the
New Fund Offer (NFO). If the units are invested immediately at highest
NAV, the fund can show only losses through out when the market gets
in to a prolonged bear phase. During the bear period, the investor
lacks the business confidence. Hence the mutual fund can not make an
NFO . Hence the fund is not able to invest in a bear market, even
through that is the right time for buying the securities.
10. Problems of Mutual Funds
8. High Price-Earning Multiples
Indian stock market is like the Indian Monsoon. When it rains , it
pours. When it does not rain, it is scorching heat. Where the market
goes high, the prices of the front-line stocks have a tendency to
skyrocket. Naturally the funds can buy only a lesser number of hare
with lower earning capacity. This affects the performance of the funds.